Pipeline runs dry for ASX as firms exit
A dearth of new listings and a rising number of takeovers are delivering a new challenge to the Australian Securities Exchange.
A dearth of new listings and a rising number of takeovers are delivering a new challenge to the Australian Securities Exchange as 2019 gets under way.
Coupled with extreme swings in markets, investors confront a difficult period ahead as the pipeline of initial public offerings looks sparse after floats underwhelmed investors in 2018.
ASX listings were few and far between with just 65 IPOs last year, the lowest number since 2013, according to Refinitiv data, which excludes deals where no adviser is listed.
New floats amounted to $US5.4 billion ($7.7bn), above the $US3.7bn in 2017, but far less than the value of companies that departed the ASX in 2018.
The bourse’s latest figures show the number of listed ASX companies was flat at 2284 on December 31 from a year earlier. That was up from 2195 in 2013, but total listed companies over a decade remained largely unchanged.
This means limited opportunities for fund managers, particularly as mid-tier investments dry up as a result of takeovers.
Disappearing from the ASX last year, due to being acquired, were companies including shopping centre empire Westfield, Investa Office Fund, Murray Goulburn, Sirtex Medical, Lifehealthcare and Capilano Honey.
Packaging titan Amcor shifted its primary listing to the New York Stock Exchange after the purchase of US group Bemis.
That trend doesn’t look like changing in 2019.
Cashed-up private equity firms — which had $9.2bn to deploy in 2018 — increasingly turned their attention to the ASX. While public-to-private deals are fraught with danger, there are several listed companies that remain in the crosshairs of private equity, including pet group Greencross, debtor finance firm Scottish Pacific and MYOB.
Asset management giant Brookfield is also pursuing hospital group Healthscope and China’s Jangho this week lobbed a $2bn takeover for medical and pathology group Healius, formerly Primary Health Care.
The return of volatility has also added to the IPO scrapheap, and many of 2018’s larger ASX floats performed poorly, leaving fund managers skittish about participating about this year.
Viva Energy and Coronado Global Resources were part of the 2018 listing crop, and both stocks are languishing well below their respective issue prices.
Eley Griffiths Group boss and portfolio manager Ben Griffiths said his analysis suggested the average IPO return last year was negative 17 per cent.
“Investment banks will need to have a pretty compelling case to come and see us and a credible rationale for (the IPO candidate to go to) public life,” he said.
“Sentiment is sufficiently bruised that primary issuance will need to be very compelling to get up in any way, shape or form.”
While Mr Griffiths doesn’t see any near change to the IPO market’s challenges, he is mindful that quality floats and issuance can return.
“One thing I’ve learnt is that the (IPO) window can slam shut, but it can also reopen,” he said.
After the tumultuous float of department store Myer in late 2009 and the fallout from the global financial crisis, the IPO market remained in hiatus for several years until the ASX listing of Virtus Health in mid-2013 buoyed confidence.
JPMorgan’s head of equity capital markets Jabe Jerram is mindful of the IPO market’s challenges, particularly if further ASX companies are taken over as more money flows into superannuation.
“We absolutely want to see more businesses coming to market. We’ve got a larger amount of capital coming in, and as we continue to see more take private M&A it needs to be balanced with high-quality new issuance.”
Part of Australia’s conundrum, according to Mr Jerram, is that the technology sector hasn’t been a hotbed of activity as it has in other markets.
“Australia, other than a few exceptions, really hasn’t seen the same degree of big tech listings.”
Large IPOs that were shelved last year include Latitude Financial and online property settlement group PEXA. The latter was sold instead to a consortium led by Link Group. Quadrant Energy was also sold rather than taken to public markets.
In the listed investment company sector, boutique fund manager Firetrail and Cadence Capital were among firms that put offers on ice after the dismal listing of hedge fund L1 Capital’s $1bn new fund.
The issue of fewer IPOs than companies being taken off the ASX — sometimes referred to as de-equitisation — has been the topic of research for at least four years at Credit Suisse.
Strategists there have cautioned of a “shrinking” Australian equity market, particularly as the cost of debt remains low.
In a note in early 2016, they warned that equity demand would “exceed supply” and said strong M&A the previous year had seen $16.1bn of market capitalisation leave the ASX’s key index.
That included the takeover of Toll Holdings.
But ruling off 2018, it’s not bad news for investors, stockbrokers and investment banks. The ASX’s December market statistics included some bright spots. There was a jump in cash equities trading volume and value in December.
For the 2018 year, the average daily value of traded shares on market was $4.4bn, up 6 per cent on the prior year.
Daily futures and options on futures volume also rose last year.
Equity capital markets activity in 2018 was buoyed by secondary raisings — where companies raise capital to fund acquisitions or shore up their balance sheet. ECM volume was $US27.6bn in 2018 compared to $US23.3bn a year earlier.
Australian announced M&A ended 2018 with a bang with deals totalling almost $US165bn, the highest annual period since 2011.